Sallie Mae suing to bar buyout group from exiting

J.C. Flowers-led buyers are balking at paying a $900 million breakup fee

By

MurrayColeman

SAN FRANCISCO (MarketWatch) -- The multibillion-dollar buyout of education lender SLM Corp., the parent of Sallie Mae, is going to court.

And the group lined up to complete what was valued at a $25 billion takeout said late Tuesday its revised acquisition proposal for Sallie Mae expired without discussion. The private equity firm leading that effort, J.C. Flowers & Co., also called the student lender's lawsuit filed a day before "meritless."

Attorneys for Sallie Mae, which manages some $153 billion in college loans are trying to block a group that includes Bank of America Corp.
BAC, -0.59%
and J.P. Morgan Chase & Co.
JPM, -0.79%
from renegotiating or backing out of the deal.

In the suite, Sallie Mae
SLM, -0.26%
is charging that J.C. Flowers and its partners must either pay a $900 million breakup fee or stick to terms of the deal, as valued in the agreement at $25 billion. The suit was filed Monday in Delaware Chancery Court.

"This is pretty close to the final straw for this deal," said Sameer Gokhale, an analyst at Keefe, Bruyette & Woods Inc.

'This is pretty close to the final straw for this deal.'
Sameer Gokhale, Keefe, Bruyette &amp; Woods Inc.

On Thursday, Sallie Mae is scheduled to report its third-quarter earnings. Gokhale estimates Sallie Mae earned $273 million, or 63 cents a share. That would represent a drop from 73 cents a year earlier.

Threatening to walk away from the deal reached in April, the buyout group sought to revise the deal at a lower price, saying that recently passed legislation curbing federal subsidies to student lenders is likely to hurt Sallie Mae's earnings.

"These next few days are going to be a very important period for them," Gokhale added. "At noon on Thursday, Sallie Mae has its shareholder meeting."

That's scheduled to be held after earnings are reported. Analysts say Sallie Mae could use its forum with shareholders to bolster its argument and provide more details about how it plans to move forward with the lawsuit and negotiations.

"The lawsuit filed by Sallie Mae rests on a fundamental misunderstanding of the terms of our contract, and is without merit," a J.C. Flowers spokeswoman told Dow Jones Newswires. "This is a dispute that should be resolved in the board room, not the court room."

Sallie Mae said it received a letter Monday from the buyout group claiming a "material adverse event" had taken place because of the subsidy legislation. Under the agreement, such an event could free the group to walk away from the deal without paying a breakup fee.

Last week, the J.C. Flowers group gave SLM a new proposal, seeking a price of $50 per share in cash, some $10 less than its original offer in April. The group said at the time it would include warrants to make up the difference.

Shares of SLM Corp. closed down 1.4% in heavy trading on Tuesday at $48.50.

"The $50 counter-offer that Flowers put up on the table is so low that there's no way Sallie Mae can accept this," analyst Gokhale said. "That offer was set to expire today."

Last week, at least three large shareholders of Sallie Mae reportedly backed the student lender's efforts to block the J.C. Flowers group from reducing its price.

Money manager Barrow, Hanley Mewhinney & Strauss, Sallie's largest shareholder with an 8% stake, said it stands by the company's decision to hold the buyers to their initial offer of $60 a share, according to published reports.

Other shareholders Capital Guardian Trust Co. and hedge fund QVT financial were also said to be siding with Sallie.

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